My friend STE took some time out to write his reflective piece about volatility and risk. You can read a misconception about investing risk and market volatility.
STE explains that volatility is short-term panics that disrupt you from building long-term wealth, but it’s not risk. He cited how great investors like Buffett, Peter Lynch and Howard Marks look at the volatility and risk opinion.
I came from the school of understanding that risk is a permanent loss of capital, and volatility does not equal risk.
But as I age and see more of the market, I can understand why volatility is risky.
You will look at volatility differently from risk depending if you are referring to a basket of securities or an individual security.
Let me try and explain.
My training as a systems safety engineer has led me to understand that risk is a deviation from the intended path.
But what is the “intended path”?
If we are discussing an Individual Security
There is a real risk that individual security will not appreciate based on its intended path ( which is up or down based on your assessment). For example, you assess that Boeing trades at $148 today but its intrinsic value if you stay invested 20 years from now is closer to $450.
Based on the baseline of how well individual companies tend to survive, most companies don’t really survive in the long run, and only a minor number do survive individually.
There is a real risk of a company like Boeing going bust. That uncertainty creates an opportunity for a potential return.
The market constantly reprices a security based on new information. So, if there is a big volatility downturn, the market doesn’t believe the stock will do well or even